Introduction to Cover Orders

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Introduction to Cover Orders

A Cover Order is a special type of order through which the user can take an intra-day position and take advantage of extra exposure while being protected through a stop loss order. Here is how it works.

The system will place two orders simultaneously: a market order and a corresponding stop loss market order which would only get triggered at the specified stop loss trigger price. If the trigger price is hit, the stop loss order gets executed as a market order. The combination of both these orders being placed simultaneously is known as a Cover Order. Cover Orders help you limit any potential losses that could be incurred on a position.

Benefits of Cover Orders

Limited Risk and Maximum Profit: Due to the inherent way Cover Orders work, they help traders minimize downside risks and provide better control over risk management. Since there is always a stop loss corresponding to each trade, Cover Orders can help users trade in a more disciplined manner. Users can take advantage of the margin benefits as well, using the Cover Order facility to leverage their positions greatly while enjoying the benefits of a stop loss to protect them from downside risk. Overall, Cover Orders reduce downside risk but do not impose any limits on their returns. This is a classic example of a win-win situation.

How Cover Orders Work:

  • A Cover Order is basically a two legged order. The client needs to place a buy/sell order with compulsory corresponding stop loss order in the opposite direction.
  • The first entry order will always be a market order.
  • The corresponding stop loss order will sit in the order book as a Stop-Loss trigger pending order; once the trigger price hits the stop loss limit price, it gets triggered as a market order.
  • The trigger price range will be defined daily and the client must place the stop loss order within the specified range. For example, suppose Reliance Industries is trading at Rs. 900 and the range is specified as 10%. In this case the client can specify the Stop Loss order between the price range of Rs.810 to 990 as the trigger price.
  • Once the Cover Order has been placed and the first leg has been traded, the client will not have the ability to cancel the Cover Order. The client can only exit the current one sided position.
    • In the very rare case in which the first order is an open order pending at the exchange and has not been traded, the client can cancel the Cover Order.
    • The stop loss order can be modified within the stipulated price range. After the order has been modified, the margin will be recalculated.

How to Place Cover Orders

Executing a Buy Cover Order Entry: The client can execute a buy Cover Order from the Orders and Trades menu. The client can also execute a Cover Order entry from the Market Watch screen by utilizing the keyboard shortcut Shift+F1 for the script he wants to trade.

Executing a Stop Loss Sell Order: After placing a buy Cover Order, a stop loss sell limit order will be placed. The stop loss buy order trigger price must be within the range that is displayed on the trigger price range box. The Trigger Price Range is the Last Traded Price + Trigger Percentage of the LTP price.

CoverOrder1

Executing a Sell Cover Order Entry: The client can execute a sell Cover Order from the Orders and Trades menu. The client can also execute a Cover Order entry from the Market Watch screen by utilizing the keyboard shortcut Shift+F2 for the script he wants to trade.

Executing a Stop Loss Buy Order: After placing a sell Cover Order, a stop loss buy limit order will be placed. The stop loss buy order trigger price must be within the range that is displayed on the trigger price range box. The Trigger Price Range is the Last Traded Price + Trigger Percentage of the LTP price.

CoverOrder2

Modification of Cover Orders:  After a Cover Order is placed, the client can see the Stop Loss pending order from the order book. The Client can open the order book from the order and trades menu. The client can also use the shortcut key F3 to open the order book. Modification of a stop loss order is allowed up to the stipulated trigger price range.

Cancellation of Cover Order: Cancellation is not allowed for Cover Orders.

Exiting a Cover Order position: Exiting a cover order position will place a market order in the opposite direction for the first leg. Once the order has been executed, the stop loss order will automatically get cancelled. The client can only exit the position by pressing the exit button from the order book after selecting the order he wishes to exit. The exit button is located at the bottom of the order book.

CoverOrder3

Example of a Cover Order: Nifty Futures

A client places a buy Cover Order on NIFTY FUTURES where the LTP of NIFTY is 6200. Therefore, he would be allowed to place a stop loss order in the range of up to 5 % below 6200; i.e. 5890.

The margin calculation will be the higher of:

  1. Price difference % between Leg 2 SL order and Leg 1 LTP * 1.5
  2. Min Margin % of the value traded

The applied margin is as displayed below for different stop loss prices. (Min margin % is 2.5% for NIFTY Futures).

Sell SL Range
SL PriceMargin
61507827.5
61007827.5
600015000
590022500
5800Not Allowed

Example of a Cover Order: Equities

A client places a buy Cover Order on INFY where the LTP of INFY is 3665, and he would be allowed to place a stop loss order in the range of up to 10 % downside; therefore, he can place he sell stoploss at a price of 3482 or above. The applied margins are as displayed below for different stop loss prices (Min margin % is 5%).

Quantity (in shares)Sell SL Range
SL PriceMargin
100360018325
100355018325
100350024750
100340039750
100330054750
1003250Not Allowed

Downloading Margin Files

Margin files are updated daily here.

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